Why the hype about saving?

New Zealand doesnot have a long term saving problem.   With open capital markets, the decisionto save or borrow is purely a financing decision, and one that is driven by theprice of credit.   The international price of credit is very low at present.  Taking advantage of these low prices is a rational response by New Zealanders.

The more important question is: how wellare we using this cheap credit?   Here the answer is not so clear.   There aresome strongly performing firms and industries in New Zealand.   But there are also many distortions toprice signals, a lack of competition in key markets, high compliance costs forbusinesses, and a large and poorly performing public sector.[1]    

Addressing these growth issues is farmore important for the future wellbeing of New Zealanders than promoting savingschemes.   This is particularly the case for schemes like KiwiSaver that willlargely benefit higher income earners and the savings industry – neither ofwhom require special assistance from the government.

Adding up the debt

New Zealand is anindebted nation.   At the end of 2006, New Zealand’s net international liability was $143 billion or 89% of GDP.   Acurrent account deficit of $14 billion (or 9% of GDP) in 2006 implies that NewZealanders continue to rely on other people’s savings to fund investment in < >New Zealand.   These are the figures thatare used to imply that New Zealand has a savings problem.  

The current account deficit is definitelyhigh.   But so is the differential between New Zealand interest rates and those overseas.   The bill rate in < >New Zealand is close to 8%.   In < >Japan it is closer to 0.5%.   Even withexchange rate risk there are plenty of people who are willing to invest theirmoney in New Zealand, which viathe intermediary of New Zealandbanks, have lowered the cost of credit for New Zealanders.   If people want tolend us money at ridiculously low rates it is not surprising that we should pigout on such cheap money.  

Ultimately the national debt positionreflects financing decisions.   Despite whatever you might hear, New Zealandersare savers.   National savings can be calculated as the sum of physicalinvestment and the current account balance.   In 2006, physical investment in < >New Zealand accounted for 24% of GDP.  This figure means that even with a current account deficit equivalent to 9% ofGDP, New Zealand as a whole wassaving around 15% of its income in 2006.

Perspectives on saving

The issue then is not whether we save,but what is the appropriate level of saving?   This question is not one that hasany clear answer.   The appropriate level depends on our individual preferencesfor saving for the future as distinct from spending today.   These preferencesare, in turn, influenced by the return we expect from investment projects andthe relative cost of borrowing.   We can fund investment projects from saving(ie deferring current consumption) or borrowing (foregoing some futureconsumption by the amount that we spend on interest payments).  

Much of the debate about saving seems toimply that saving is a moral issue.   If you save you are preparing for your oldage, which is good.   If you borrow money, you are neglecting your savingsobligation and are going to be a drain on society in the future, which is bad.  Although there may be some situations where this is true, in general, savingand borrowing is about how we decide to finance current and futureconsumption.  

A crucial reason why we are an affluentsociety is that we generally have considerable choice about how we organise ourfinances.   We do not have to fund all our activities out of current income, we earnincome from our savings, and we can borrow money to purchase large items likecars, houses and businesses.   What matters is not how much we are saving or borrowingat any one point in time, but how wisely we use these funds.  

Many strong-performing businessesconsistently rely on borrowed money to fund their investment activity.   Ifthese businesses did not borrow, they would not have expanded their operationsas fast.   They would have missed profitable opportunities.   Although they maybe perennially "in debt", it is the wisdom of their investment that drivesinvestor sentiment about the company, not their indebtedness per se.   Debt onlybecomes an issue if the investments do not perform, and they then struggle toservice their debt.  

On this criteria, how does New ZealandInc measure up?   In 2006, our foreign debt servicing cost was $7 billion, whichis a large sum, but represents just 4.4% of GDP.   There is no question that NewZealanders can afford to service their offshore borrowing.   If we have aproblem with this borrowing it is not about the affordability, but aboutwhether the economy can generate the returns to justify the cost.   Mostrecently, in 2006, when nominal GDP increased by just 4%, it does not look likewe have made a great use of these borrowed funds.   There are two ways ofrectifying this situation – do we look at borrowing less or improving thereturns on the investments?   It is our view that too much of the debate hasbeen about raising savings and too little on improving the returns fromsavings.   The government’s current KiwiSaver initiative is a case in point.

A hard way to raise savings

It seems unlikely that KiwiSaver will bean efficient means of raising national saving.   As it stands it requires bribesto encourage people to lock funds into the scheme, which means, from a nationalperspective, that the scheme will need to outperform other existing savingvehicles just to break even.   If the mooted plans to offer further taxincentives materialise, the scheme will be made yet more attractive to upperand middle income earners.   These people pay the most in tax already and sowill gain the most advantage from a tax link – but are these really the peoplethat are likely to have a saving problem?  

From a national perspective it is thereturns net of administrative costs that are important.   The savings industryhas already spent millions preparing for the introduction of the scheme, mostof which has been spent on dealing with administrative and legal issues.   Thewillingness for all this spending indicates that the savings industry can spota gravy train when they see one.  

Few commentators expect KiwiSaver toraise national savings.   It may initially raise savings, but increasing grosssavings does not guarantee a net increase in savings – the scheme can not stoppeople from borrowing elsewhere.   Investing in the KiwiSaver scheme will beworthwhile for many people, but it does not mean that their overall level ofsaving will necessarily increase.  

Ultimately if you want people to savemore you have to make it in their interests to do so.   This means eitherincreasing the returns from total saving or discouraging consumption spending.  The government already has two broad instruments that could influence savingincentives in a transparent and direct way: it could reduce the tax rate oninterest income and it could increase the GST rate.   A combination of the twocould increase private savings in a fiscally neutral way.   Higher saving wouldreduce the extent that we borrow from overseas, but would still not address themore important issue of increasing the returns from investing.


[1] Labour productivity in New Zealand grew by 1.2%pa in the 14 years from 1991 to 2005.   Statistics < >New Zealand estimates that labourproductivity growth was 2.3%pa in 63% of the economy (primary, manufacturingand the non-public service parts of the service sector) over this period.   Theimplication is that labour productivity fell by 0.7%pa in thepublic service sectors of the economy.

Enjoyed this article?

You might like to subscribe to our newsletter and receive the latest news from Infometrics in your inbox. It’s free and we won’t ever spam you.